Tax planning for armed forces personnel.

• Author: Garrison, Larry R.
• Position: Part 1

Clients serving in the U.S. Armed Forces are subject to many special rules that may provide tax savings opportunities. Part I of this two-part article examines income inclusions and exclusions, the special exclusion for combat zone duty, various adjustments to income, dependency exemptions and itemized deductions.

EXECUTIVE SUMMARY

* MAFs are defined as commissioned officers or enlisted personnel in all regular and reserve units under jurisdiction of the Secretaries of the Defense, Army, Navy or Air Force (including the Coast Guard).

* "Service in a combat zone" includes any period a MAF is absent from duty due to sickness, wounds, leave or internment by the enemy or other lawful cause.

* A dependency exemption generally cannot be claimed for a person who is a MAF or in attendance at an Armed Forces academy.

Due to the recent deployment of U.S. Armed Forces personnel in the Balkans and their continuing presence in the Persian Gulf region, tax practitioners need to know the special tax provisions applicable to members of the U.S. Armed Forces (MAFs). Part I, below, addresses income inclusions and exclusions, combat zone exclusions, adjustments to income, exemptions and itemized deductions.

Definition

For Federal tax purposes, MAFs are defined by Sec. 7701 (a)(15) and Regs. Sec. .301.7701-8 as commissioned officers or enlisted personnel in all regular and reserve units under jurisdiction of the Secretaries of the Defense, Army, Navy or Air Force (including the Coast Guard).

Income

Generally, payments received by MAFs are taxable for Federal income tax purposes. However, under special rules, certain items of income may or may not be includible.

Inclusions

According to IRS Pub. 3, Armed Forces' Tax Guide, the following items received by a MAF are includible in gross income (unless the combat zone exclusion applies, as discussed below):

* Basic pay: active duty; attendance at a designated service school; back wages; drills; reserve training; training duty.

* Special pay: aviation career incentives; diving duty; foreign duty (i.e., outside the 48 contiguous states and Washington, DC); hostile fire; imminent danger; medical and dental officers; nuclear-qualified officers; special duty assignment pay.

* Bonuses: enlistment; reenlistment.

* Other payments: accrued leave on separation; mustering out; personal allowances paid to high-ranking officers; student loan repayment from certain programs (i.e., General Educational Loan Repayment Program).

Exclusions

Sec. 134(a) states that gross income does not include any "qualified military benefit" defined by Sec. 134(b)(1) as any allowance or in-kind benefit (other than personal use of a government-provided vehicle) received by a MAE former MAF or his dependent. The following items are excludible from gross income, according to Armed Forces' Tax Guide:

* Living allowances: basic allowance for housing (BAH); basic allowance for subsistence (BAS); housing and cost-of-living allowances abroad (whether paid by the U.S. or a foreign government); variable housing allowance. (Sec. 265(a)(6) provides that mortgage interest and real estate taxes on a personal residence are deductible even if paid from a BAH.)

* Family allowances: certain educational expenses for dependents; emergencies; evacuation to a place of safety; separation.

* Death allowances: burial services; death gratuity payments (up to $3,000) to eligible survivors; travel of dependents to burial site.

* Moving allowances: dislocation; move-in housing; moving household and personal items; moving trailers or mobile homes; storage; temporary lodging and related expenses.

* Travel allowances: annual round trip for dependent students; leave between consecutive overseas tours; reassignment in a dependent-restricted status; transportation for a MAF and his dependents during ship overhaul or inactivation.

* Other payments: defense counseling; disability; group-term life insurance; professional education; ROTC educational and subsistence allowances; survivor and retirement protection plan premiums; uniform allowances; uniforms furnished to enlisted personnel.

* In-kind military benefits: legal assistance; space-available travel on government aircraft; medical and dental care; commissary/exchange discounts.

Foreign-Source Income

The Sec. 911(a)(1) foreign earned income exclusion does not apply to earned income of military and civilian employees of the U.S. Government. For this purpose, "U.S. Government employees" include those working at Armed Forces post exchanges, officers' and enlisted personnel clubs and embassy commissaries, and similar personnel paid from nonappropriated funds. However, foreign-source income earned by military or civilian employees or their spouses from sources other than the U.S. Government may be eligible for the foreign earned income exclusion. The items listed above as excludible continue to be excludible regardless of the availability of the foreign earned income exclusion. For 1999...